chapter 18: game theory

Question 1

what is game theory?

Answer 1

the science of making good decisions in situations involving strategic interaction

Question 2

what is strategic interaction?

Answer 2

when your best choice may depend on what others choose, and their best choice may depend on what you choose

Question 3

what are the four elements of a game?

Answer 3

1. players
2. rules that specify
   (i) actions available to players at every point in the game
   (ii) timing of moves or choices by players
   (iii) information that a player has at every point in the game
3. outcomes
4. payoffs

Question 4

what are the four steps for making good strategic decisions?

Answer 4

1. consider all possible outcomes
2. think about the “what ifs” separately
3. evaluate your best response
4. put yourself in someone else’s shoes

Question 5

what is the game matrix or payoff table?

Answer 5

your choices in each row

and the other players choices in each column

the resulting squares show the possible outcomes, listing the payoffs in each cell

Question 6

what is best response?

Answer 6

the choice that yields the highest payoff given the other player’s choice

Question 7

what is nash equilibrium?

Answer 7

an eqm in which the choice that each player makes is a best response to the choices other player’s are making

not the same as socially optimal